Suntec REIT - UOB Kay Hian 2020-10-09: A Time To Sow & A Time To Reap; Upgrade To BUY

SUNTEC REAL ESTATE INV TRUST (SGX:T82U)

Suntec REIT - A Time To Sow & A Time To Reap; Upgrade To BUY

This is an opportune time to invest in Suntec REIT (SGX:T82U) as three newly completed buildings - 9 Penang Road in Singapore, 477 Collins Street in Melbourne and 21 Harris Street in Sydney - will make full-year contributions in 2021.
The Suntec City Office is expected to maintain positive rental reversion, while the return of more employees to their offices starting 28 Sep 20 will improve shopper traffic and tenant sales at Suntec City Mall.

The government has allowed half of all employees to return to work-from-office (WFO) starting 28 Sep 20, but with safe management measures in place. The increased flexibility to WFO will reduce the downward pressure on office rents. Rental reversion has moderated from +13.1% in 1Q20 to +9.1% in 2Q20, although Suntec City Office has achieved nine consecutive quarters of positive reversion.
It has completed 61% of 2020 renewals in 1H20 but positive reversion is expected to moderate in 2H20. According to Corporate Locations, current asking rents for Suntec City Office is S$9-11psf pm and higher than the average expiring rents of S$8.76psf pm for 2021.

The decline in shopper traffic has moderated to 40% of pre-COVID-19 levels in July, compared to just 10% during the circuit-breaker period. Shopper traffic and tenant sales have recovered to 50% and 75% of pre-COVID-19 levels respectively in August. Further improvement is expected as more businesses resume operations and employees return to WFO at Suntec City Office.
Rental reversion for Suntec City Mall has reversed from +16.1% in 1Q20 to -2.4% in 2Q20 and is expected to remain negative in 2H20 due to weak demand. Occupancy eased 2ppt q-o-q to 96.3% in 2Q20 and is expected to soften towards 90%.

Suntec Convention was closed from 7 Apr 20 to 2 Oct 20 and incurred losses of S$4.1m in 1H20. Suntec REIT has injected S$40m to support Suntec Convention in Jul 20.
The Singapore Tourism Board (STB) will start accepting applications for meetings, incentives, conventions & exhibitions (MICE) events of up to 250 attendees from 1 Oct 20 (the number was capped at 50 since Jul 20). Unfortunately, the recovery in the MICE events is currently restricted to local corporate events and consumer shows.

Suntec REIT will benefit from full-year contributions from 9 Penang Road, 477 Collins Street and 21 Harris Street in 2021. We estimate the three new office buildings will contribute 10% of total NPI and JV income contribution in 2021.
Suntec REIT has submitted development application to redevelop the retail podium and construction of a new office tower at Southgate Complex in Melbourne, which is currently being reviewed by the relevant authorities.

9 Penang Road obtained temporary occupation permit (TOP) in Oct 19. The two office towers were 100% pre-leased to UBS (occupying all eight office floors with NLA of 381,000sf starting 2H20). UBS will occupy the building starting 2H20. The building also has 15,000sf of retail NLA predominantly for food & beverage. Thus, there will be 6 months of income contribution from 9 Penang Road in 2020.
Suntec REIT has a 30% stake in 6 Penang Road.

Suntec REIT obtained practical completion for 477 Collins Street at end-July and income contribution from the building commenced in 1 Aug 20.
Suntec REIT has a 50% stake in the 39-storey office building located within the Melbourne CBD free tram zone with four tram lines serving Collins Street. The main entrance incorporates facades of three heritage-listed buildings. The building is 97% pre-committed with a long weighted average lease expiry (WALE) of 11 years. Its key tenants include Deloitte, Lander & Rogers, Norton Rose Fulbright and Urbis. Thus, there will be 5 months of income contribution from 477 Collins Street in 2020.

Suntec REIT has completed the acquisition of 21 Harris Street, a campus-style grade A newly completed 9-storey office building located at Pyrmont, on 6 Apr 20. The property has a total NLA of 203,400sf, comprising office NLA of 181,900sf (89%) and retail NLA of 21,500sf (11%). The property is 91.2% pre-committed with a long WALE of 10 years. Publicis Groupe is anchor tenant (66.5%).
The property provides initial NPI yield of 5.5% and annual rental escalation of 3-4%. There are 3 years of rent guarantee on any unoccupied office space. Thus, there will be 9 months of income contribution from 21 Harris Street in 2020.

Suntec REIT intends to deepen its presence in Australia. It plans to expand the allocation to overseas markets to 30-40% of AUM in the next 3-5 years (currently: 16%). Suntec REIT continues to explore strategic investments in other key gateway cities, such as Seoul, Tokyo, London, Paris, Frankfurt and Berlin.

Suntec REIT retained 10% of distributable income (S$10.3m) and held back capital distribution in 1H20. We have assumed that Suntec REIT to release S$5m of distributable income retained in 2H20.
We forecast Suntec REIT's DPU of 6.7 S cents for 2021 and 7.3 S cents for 2022.
See Suntec REIT Share Price; Suntec REIT Target Price; Suntec REIT Analyst Reports; Suntec REIT Dividend History; Suntec REIT Announcements; Suntec REIT Latest News.

Jonathan KOH CFA UOB Kay Hian Research | Peihao LOKE UOB Kay Hian | https://research.uobkayhian.com/ 2020-10-09

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